What does the National Security and Investment Act 2021 mean for finance transactions?

• United Kingdom

• Banking and finance
• Competition, EU and Trade - Foreign investment regimes
• Corporate
• Mergers and acquisitions

30-07-2021

This briefing is focused on the potential implications of the NSI Act on finance transactions. For the background and detail of the content of the NSI Act please refer to the briefings and podcast published by our Competition, EU and Trade team:

Further guidance from the UK Government on the new national security investment regime and the likely impact on M&A

UK Government gets CFIUS: new National Security regime moves one

UK Government proposes National Security and Investment Bill

Podcast: UK National Security and Investment Bill

What is the National Security and Investment Act 2021?

The National Security and Investment Act 2021 (the “NSA Act”) creates a new, standalone regime enabling the UK Government to scrutinise and intervene in acquisitions and investments to protect national security in the UK. The regime captures both UK and overseas investors and will come into effect on 4 January 2022. From that date:

• mandatory notifications will be required to the UK Government before completing share acquisitions in a list of specified sectors; and

• the UK Government will be able to review acquisitions of shares or other qualifying assets (land, tangible moveable property¹ and intellectual property) completed on or after 12 November 2020 that it reasonably believes pose a risk to national security in the UK (this review power is not limited to the specified sectors). The UK Government can call-in a transaction for review for up to 5 years after it has taken place or up to 6 months after it becomes aware of the transaction.

We note that not all acquisitions will be notifiable – there are control thresholds and other conditions to be met for a transaction to be notifiable. Further details can be found in our previous briefings linked below.

What are the specified sectors?

The current list is below. This is subject to change.

New guidance for businesses

On 20 July 2021, the UK Government published a range for guidance for businesses on the NSI Act:

National Security and Investment Act: prepare for new rules about acquisitions

How the National Security and Investment Act could affect people of acquisitions outside the UK

The National Security and Investment Act alongside regulatory requirements

National Security and Investment Act: guidance for the higher education and research-intensive sectors

5 ways the NSI Act may impact on finance transactions

1. Due diligence

It should be relatively straightforward to identify whether a share acquisition meets the required control thresholds and is in one of the specified sectors. If that share acquisition is being financed by debt, expect the lenders to require a mandatory notification to be made (and clearance received) as a condition precedent to the loan. It will be trickier to determine whether a transaction has national security sensitivities, not least because this applies to a wider range of assets and because it is ultimately subjective – would the UK Government have a reasonable suspicion that the transaction may pose a risk to national security. We would expect questions to be asked as part of the due diligence process. For financing arrangements, parties also have to think ahead to potential transfers of assets on the enforcement of security (see point 4 below). The latest guidance sets out the risk factors that will be taken into account (being target risk, acquirer risk and control risk)². 

Given the timing implications (see point 2 below), parties will want to identify whether a mandatory notification is required or a voluntary notification is advisable as early as possible in the transaction, to avoid later delay.

2. Transaction timing

If a mandatory notification is required or the parties agree a voluntary notification would be advisable then expect to see this reflected in the conditions precedent to any financing and also in the transaction timetable. The UK Government has 30 working days (with the potential to extend by 45 working days) to complete its initial assessment following a notification.

If a mandatory notification is required that parties should not complete the transaction until the go-ahead is received from the UK Government. If a voluntary notification is required then parties are allowed to proceed but it would be at the risk of the transaction being unwound by the UK Government following its review (this is a worst case scenario).

If, following the due diligence process, parties are in any doubt about whether there is a potential national security concern then we may see cautious voluntary notifications and to quote our Competition, EU and Trade team “it will be important that the Investment Security Unit [within the Department of Business, Energy and Industrial Strategy] is given sufficient resources to be able to deal with the anticipated high level of notifications”³. 

3. Drafting of finance documents

In addition to conditions precedent being included in finance documents requiring notifications (and clearance) we may start to see additional undertakings and representations being required on this topic. For example, if the parties assessment is that the transaction is outside the specified sectors and does not create a national security risk, expect to see borrowers being asked to confirm this in writing in their facility agreement representations. Another drafting implication will be for share security. There is a temptation for secured parties to take as much control as possible, however it will be important for voting rights in respect of shares to stay with the shareholder prior to enforcement. Careful thought should be given to the triggers for transferring voting rights to a secured party.

4. Enforcement of security

If a secured party is enforcing security over shares or other qualifying assets then there may be timing implications if that enforcement triggers a mandatory notification or an advisable voluntary notification (for example, the enforcement involves the sale of an asset). Hopefully this will have been considered at the time of taking security but, particularly given the retrospective effect of the NSI Act, this may not always be the case. The NSI Act may also impact on the chosen method for enforcement as there are exemptions for rights exercisable by an administrator.

5. Legal opinions

Finally, given that we do not expect there to be a definition of ‘national security risk’ law firms will be unable to confirm with certainty that, if a decision has been made not to make a voluntary notification, a transaction won’t be called in for review. This is likely to be covered by qualifications in legal opinions.

Conclusion

While the prospect of the underlying transaction or enforcement of security being unwound sounds alarming, the latest guidance from the UK Government makes it very clear that “The NSI Act is not a system for screening all acquisitions in the economy”⁴ and also that the sectors identified for mandatory notifications are the key concern, acquisitions outside those sectors (and closely linked areas of the economy) are less likely to give rise to a national security risk. The unwinding or blocking of a transaction is expected to be a last resort.

If you are concerned about a transaction entered into from 12 November 2020 then the transaction can be discussed informally with the ISU before the NSI Act comes into effect in January 2022.

1. This refers to assets that are capable of being touched and moved, ranging from ships and aircraft to furniture and paintings.

2. National Security and Investment Act 2021: Draft statement for the purposes of section 3 (publishing.service.gov.uk)

3. UK Government gets CFIUS: new National Security regime moves one- Publications - Eversheds Sutherland (eversheds-sutherland.com)

4. National Security and Investment Act 2021: Draft statement for the purposes of section 3 (publishing.service.gov.uk) (paragraph 7)